In today’s economy, controlling electronic discovery costs has taken on a new urgency. Because the financials of many companies have deteriorated so quickly, there is great interest in finding methods to reduce any costs in the short-term. As a result, anyone in a company’s IT or legal department that comes up with a plan to substantially reduce their company’s electronic discovery costs in the short-term is likely to become a hero in their company. So, what’s the best way to reduce electronic discovery costs quickly?

A natural first step is to decide where to focus. Which electronic discovery activities are the most costly today? Which have the greatest room for cost reductions? The EDRM model serves as a good guide for answering such questions by breaking electronic discovery activities into Information Management, Identification, Collection, Preservation, Processing, Analysis, Review, Production and Presentation. One thing I have noticed when interacting with enterprises is that the IT and legal departments tend to focus on different stages within electronic discovery based on their perspective. IT managers naturally concentrate on the information management, identification, collection and preservation activities because these are the activities in which they are most involved. Similarly, legal managers naturally look to preservation, processing, production and review.

Given these different perspectives, it’s important to take an objective approach to calculating electronic discovery costs. Doing so is not that easy. Costs can vary significantly depending on each company, the nature of the case, nature of the data, which vendors/technologies that are used and a variety of other factors. Costs also come in many different forms: direct hard dollar costs, such as spending on legal and electronic discovery fees delivered by third parties; indirect hard dollar costs, such as time spent by company employees; and soft dollar costs, such as increased risk that could lead to adverse judgments and sanctions. Finally, electronic discovery costs are often buried across both legal operating budgets and IT budgets making it hard to separate these costs from the costs of other activities.

Undertaking an internal analysis to understand your company’s electronic discovery costs is a valuable activity if you want to better control these costs. However, while costs do vary between companies, most companies will find that the same activities contribute the most direct hard dollar costs and that these are the costs that are easiest to control in the short-term. To demonstrate this, let’s walk through a generic cost analysis of a typical case. Fortunately, we don’t have to start from scratch in doing this. Leonard Deutchman, an author of several excellent electronic discovery articles, has already done most of the work in a May 2007 article, “Get Ready for the Rules Changes, Part VIII“. In this article, Mr. Deutchman walks the reader through a hypothetical litigation between an Investor and a Venture Capital firm. He describes the typical electronic discovery activities and calculates the direct hard dollar costs for these activities including:

Collection: Mr. Deutchman calculates that it costs $10k to collect 400GB from 8 hard drives and the data of 8 custodians on file and email servers using an outside vendor (doing it in-house can be less expensive). Note that this excludes any collection from back-up tapes, which can be more costly.

Culling & Processing: it costs $4k to reduce the 400GB to 90GB by removing non-relevant file types prior to processing. Processing 90GB costs $90k at $1000/GB. De-duplication and the application of search terms reduce the data to 25GB.

Production: it costs $4k to produce the 4GB of data that is deemed responsive and not privileged to produce to the other side.

Mr. Deutchman doesn’t identify direct hard dollar costs for Information Management, Identification or Preservation. These activities are typically not associated with direct hard dollar costs on a per matter basis. Rather, they involve indirect hard dollar costs such as employee time and software licenses. Mr. Deutchman also does not provide an estimate for the costs of review. However, since review does contribute significant direct hard dollar costs for every matter, this gap needs to be filled in order to get a complete sense of the direct hard dollar costs. The two big buckets of cost in review are: attorney review costs and review software costs. In Mr. Deutchman’s hypothetical litigation one might imagine the following scenario for these costs:

25GB translates into 195,000 documents using the low end of the documents per GB email (9,000/GB) and documents per GB files (7,000/GB). Industry survey data that is available from EDRM. This example assumes that 40% of the 25 GBs is email.

The attorneys reviewing the data charge $75/hour and make 100 document decisions per hour. This translates to approximately $146,000.

The hosted review service costs $50/GB/month and, in this case, let’s assume we host it for 6 paid months. This costs $7,500.

If we tabulate these costs and calculate the direct hard dollar cost shares for each stage, the clear take-away is that Processing and Review costs comprise the vast majority of direct hard dollar costs. Collection and Production direct hard dollar costs are significantly smaller in comparison.

EDRM Stage

Hard Dollar Costs ($k)

Share

Collection

10

4%

Processing

94

36%

Review

153

58%

Production

4

2%

Total

261

100%

Total for Processing & Review

247

94%

Now, it’s possible to come up with many arguments for why Mr. Deutchman or my estimates could be high including different assumptions for attorney hourly review costs, higher document decision rates, cheaper vendor pricing, etc. Similarly, it’s possible to come up with many arguments for why the estimates could be low including the need to perform multiple review passes, slower document decision rates, more expensive vendor charges, etc. In addition, each company will have their own unique circumstances that will change this picture. However, this generic analysis strongly suggests that more customized analyses would come to the same conclusion: if you want to reduce electronic discovery costs quickly, then you need to focus on processing and review costs. One can also imagine that even if you were to use some form of activity-based costing to allocate indirect hard dollar costs on a per matter basis, it would likely not change the importance of Processing and Review costs.

What does this mean for IT and legal managers in Corporations? These kinds of analyses make it pretty clear that, even though they are more involved in the Information Management, Identification, and Collection phase of electronic discovery, IT managers need to focus more on helping the legal team optimize Processing and Review activities. You are not going to get the biggest bang for your buck in the short-term by trying to reduce costs in Information Management, Identification, Preservation, and Collection. Similarly, legal managers need to work more closely with IT in order to focus on how to reduce processing and review costs.

So, the obvious question coming out of such an analysis is what’s the best way to reduce Processing and Review costs? We’ll discuss this issue in a future post.